ROME — The
Globe and Mail
Published
Wednesday, Oct. 30 2013, 7:11 PM EDT
Last updated
Thursday, Oct. 31 2013, 6:42 AM EDT
Canada’s
Khan Resources is gambling that an international arbitration case in Paris will
allow it to regain control of a uranium project that, it claims, was illegally
expropriated by the Mongolian government, leaving it with nothing but angry
investors.
While
Toronto-based Khan is only a bit player in the Canadian mining scene, resources
companies with far-flung operations will likely pay close attention to the arbitration.
International commercial arbitration in general, and arbitration cases against
governments in particular, are becoming increasingly popular, to the point they
are gaining favour over traditional courtroom litigation.
The rise of
bilateral investment treaties is triggering a surge in commercial arbitration
cases against governments, which are handled through the World Bank’s
arbitration court, known as ICSID – the International Centre for Settlement of
Investment Disputes. The 3,000 international treaties, covering everything from
hotel investments to dam construction, form the basis of the arbitration.
“International
arbitration is used a lot,” said Grant Edey, a former Iamgold chief financial
officer who has been Khan’s CEO since 2010. “It’s being used more often as
developing countries get more aggressive about taking control of their
resources.”
Khan had
planned to develop a uranium mine in northeast Mongolia, near the Russian and
Chinese borders, through an effective 68-per-cent stake in the Dornod deposit
with state-controlled Russian and Mongolian partners. The property’s potential
was well known. The Russians had spent about $150-million (U.S.) exploring and
partly developing the site before abandoning it 1995.
Khan took
over the project in 2003 and went public on the Toronto Stock Exchange in 2006
(it has since been demoted to the CNSX market). After spending $21-million on
exploration and development, it outlined its $330-million mining development
plan three years later and expected to be in full production by 2013. The goal
was to mine about three million pounds of uranium oxide a year over 15 years.
In 2009,
Khan’s ambitions fell apart when the Mongolian government passed a new nuclear
energy law that would allow the government to take as much as 51 per cent of
the Dornod project at no cost. Khan and a Russian company, ARMZ, would own the
rest. Khan says it wasn’t offered compensation for the downgrade to minority
partner, nor were its mining permits renewed. At one point that year, ARMZ launched
a hostile bid for Khan that went nowhere. Later, China National Nuclear Corp.
did the same. Its bid also failed.
Khan shares
collapsed, going from $4 (Canadian) to penny-stock status. On Wednesday, Khan
traded at only 25 cents a share, giving the company a market value of
$16-million.
Stuck in
legal limbo, and without control of the Dornod project, Khan launched an
arbitration case against the Mongolian government in 2011, seeking $326-million
(U.S.) in compensation.
A tribunal
was appointed and the case is to be heard in Paris starting Nov. 11.
Arbitration specialist Yves Fortier, the former chairman of both Alcan and the
Norton Rose law firm, was Khan’s nominee to the tribunal.
International
commercial arbitration cases are adjudicated behind closed doors, tend to be
shorter, and produce final decisions that can’t be appealed. But they are not
necessarily cheaper. “Over all, businesses continue to show a preference for
using arbitration over litigation for transnational disputes, although concerns
remain about the costs of arbitration,” a new PwC report on arbitration says.
Recent
plaintiff victories have made them popular options despite the costs.
Earlier
this month, Argentina agreed to compensate five companies that won arbitration
cases. The payment is to be made in the form of dollar bonds with a face value
of $506-million. The many cases against Argentina stem from the
nationalizations and currency devaluations related to the country’s sovereign
default in 2001.
The number
of registered ICSID cases last year reached 50, up from 38 in 2011.
Mr. Edey said Khan
has already spent $4-million on legal and tribunal fees. He would not rate the
company’s chances of success. “We’re looking for closure after four years of
uncertainty and insignificant value for our time, effort and money.”
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